Rewards, Returns and Ringside Seats

Key Takeaways

What?For several decades, part of the strategy has been rewards programs: promotions designed to boost consumer frequency by admitting them into an exclusive discount club.

So what?A well-designed rewards program can help induce customer loyalty, impressing a top-of-mind mentality on consumers’ thinking.

Now what? Marketers looking to woo customers with a rewards program need to incorporate experiential and emotional values into their offerings alongside traditional rational components.

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May 31, 2016

Customer loyalty programs solidify a connection between brands and consumers. But to leverage their full power, businesses need to think outside the savings card.

There's a misleading finality that comes with making a sale. Though, for merchants, individual purchases are the basic building blocks of success, every finalized transaction harbors uncertainty over whether a customer will return. A company that only sells to each consumer a single time will soon exhaust its pool of prospective clients. In that sense, the initial transaction between buyer and seller is but a prologue to the overall concern of marketing. Few businesses can sure their customers will continue to engage with them. There are always competitors offering similar products or services.

Some may be bigger, flashier or more convenient. We live in an age of disruption. How can marketers ensure return visits amid all this uncertainty?

For several decades, part of the strategy has been rewards programs: promotions designed to boost consumer frequency by admitting them into an exclusive discount club. A well-designed rewards program can help induce customer loyalty, impressing a top-of-mind mentality on consumers’ thinking. Conversely, rewards-program misfires can, at best, fail to make an impression on shopper behavior, and, at worst, harm the provider. Witness what happened earlier this year when Starbucks announced modifications to its longstanding rewards program. The changes triggered consumer outcry severe enough that Starbucks’ brand perception fell 50% in eight days following the rollout, according to market research firm YouGov, and even prompted a major European bank to downgrade its outlook on the coffee giant’s stock.

Rewards programs are an old concept. Early programs included S&H Green Stamps—paper coupons distributed to customers at grocery stores and gas stations that could be used to redeem catalog items. In their heyday, S&H Green Stamps operated 800 nationwide redemption centers and printed more stamps than the Postal Service, according to The New York Times.

By the 1980s, the genre was reimagined by airlines looking to gain an edge over the competition. “The airlines really created a much easier way for customers to earn and keep track of the points that they were accruing from various sources, and a set of redemption options that, as it grew beyond just airline tickets to include merchandise and things like that, really taught [customers] they should and could share in the value that they created for companies,” says Rob Markey, partner and global practice leader at Boston-based Bain & Company. “It taught them to pay attention to where they shopped, what they bought and whether they were maximizing the earning potential in these earning programs.”

The digital age ushered in the next phase of transformation. Digitization allowed companies to link a rewards account to a specific customer by attaching a user ID. Mobile devices enabled brands to collect data and model profiles in real time.

“The thing that changed in the 2000s was that as technology improved, and the ability to create and support rewards programs for individual retailers become much more cost effective,” Markey says. “Retailers become much more interested in creating their own programs primarily for the purpose of identifying individual customers that came into their stores—capturing information about what they bought and how often they came in—and using that as the basis for making more targeted offers to create more incentives for customers to change their behaviors in ways that would be profitable.”

Rewards programs are being redefined again. As the investment threshold to set up a rewards program lowers, more businesses of all types are offering memberships. What used to set some brands apart from the competition has now become standard practice. The spend-and-get premise that comprises a basic rewards agreement might not be enough to entice consumers to remain active over long periods of time. Marketers, in essence, are back to where they started. To separate their rewards programs from the rest of the pack, experts say, they will have to add another dimension.

Three-dimensional Values

Brands might offer a strong economic incentive to encourage participation, but it’s hard to get consumers excited about what could be considered glorified coupon flyers. To spark lasting interest, brands need to make the payoff worth signing up for.

“There are an awful lot of loyalty programs out there today that I would put in the category of frequency programs. They’re what I’d call purely economic value propositions where you shop three times and get something, or buy nine cups of coffee, get the tenth one free,” says John Bartold, senior vice president of loyalty customer experience at Texas-based marketing agency Epsilon. “It’s like any other relationship you have in life. If all it’s based on is monetary value, there is not a very deep or rewarding relationship there. You’ve got to get more into the relationship and the emotional side of things.”

Markey agrees, saying that the most successful rewards programs are drawn up after companies have determined program objectives and developed a strategy to meet them. “In the average rewards program, the terms are set up based on what a rewards-technology vendor’s system can do easily. … While those are probably OK because they, at least, get the customer to identify themselves at the point of sale and allow you to capture the data, they’re not providing differential value for differentially valuable behavior,” he says.

“In a more successful rewards program, the company spends a little more time defining what success looks like from a strategic perspective. Based on what those objectives are, the retailer will then design the program to deliver value to the customer’s earning potential in a way that increases the likelihood of getting the right behavior from the right subset of the customer base,” Markey adds.

According to Markey, there are three components that drive the best rewards program. The rational value, or monetary proposition, is a component, but it’s also supplemented by two more visceral values: experiential and emotional.

Experiential values involve providing members with access to unique events or opportunities that would be difficult or impossible to obtain without the help of a rewards program. This can entail either a privileged place among customers—a spot at the front of the line for hot products and offers, for example, or access to a personal shopper—or they can work towards desirable “bucket-list” goals like meeting a celebrity or even a chance to fly on a suborbital shuttle. These situations evoke strong desires in consumers. Instead of a discount card, a membership becomes a passport to party.

Emotional values create an attachment component that consumers will invest their personhood into. This can be done by offering different status and prestige levels that carry built-in bragging rights with family and friends. Or it could be a more heartfelt pitch.

Bartold recalls taking this approach when he worked on Walgreens’ Balance Rewards program four years ago. “Walgreens made a change from their tagline being, ‘On every corner.’ It was basically a point of distribution and a convenience message. We’re close by. Come see us,” he says. “As we were getting to design a loyalty program, they decided to make a major change in terms of how they positioned themselves in the marketplace. It went from ‘On every corner’ to ‘At the corner of happy and healthy,’ much more an emotional level of tagline than ‘On every corner.’ ”

The updated tagline reflected a strategy that Walgreens incorporated into its loyalty programs: health. A major initiative of the Balance Rewards involves offering customers health-tracking programs to monitor stats like weight loss, blood pressure or glucose levels. The soft tagline packs an emotional wallop when compared to the potentially serious subject matter the rewards program encroaches on.

“ ‘At the corner of happy and healthy’ says, ‘We’re going to try to figure out how we do things together and how we make our lives better together.’ Thus, the theme Balance Rewards. We’re here to help you find that balance,” Bartold says.

The Data at the Doorstep

To differentiate rewards programs from the competition, brands need insights into what consumers crave.

“Until you really know who your consumers are, it gets a little tough to decide what the great things that you can do as a brand are and those things that may or may not hit the mark,” Markey says. “Most of that market research is done anonymously, using focus groups or a quantitative study. That hinders visibility as to who it is that’s responding that gives marketers some insight or context around why different groups are responding in different ways.”

Rewards program data changes that. The back end of rewards programs can also serve as a powerful instrument for measuring consumer response to marketing. By tracking numbers tied to a unique rewards promotion, marketers can see exactly who responds. They can then align those responses to what consumers have purchased and what’s being talked about in social networks to build a contextual picture of users. The customer, once known, becomes infinitely easier to market to, and can form a deep connection with a creative rewards program that keeps him or her in an earning mind set.

However, this method of refinement is only available to brands collecting the right kind of data from customers. “So many retail brands that work in what I would call anonymous transactions don’t really know the consumer behind the purchase. All they know is how many transactions they had today and what the average basket looked like,” Bartold says. “To be able to have what we call open-source platforms—where it’s easier to connect to those partners, to connect to the social networks and to be able to bring data together to analyze that data in real time through rules engines and machine learning—to me, that’s the biggest advancement that we’ve got on the loyalty side. A mobile device, it’s great. It’s handy. It’s portable. It makes it easier for the consumer. For the marketer though, it’s what’s happening from a technology standpoint that’s really driving a lot of the new capabilities and innovation that’re happening in loyalty.”

To connect shopper behavior to relevant data that allows construction of customer profiles, some companies are turning to more involved rewards programs that connect to social media accounts or ramp up the level of member engagement.

“Data is really at the heart of being able to provide personalized and unique experiences to your customers, whether that is based on the demographic data that they collect or a behavior that they observe when you interact with their brand,” says Geoff Smith , chief marketing officer of multichannel loyalty and engagement software company CrowdTwist .

A self-described “big believer” in engagement, Smith’s company layers engagement components, such as social media, video, website and e-mail newsletters, on top of points-based rewards systems. Smith believes the combination of the two will prolong customer interaction by fostering a relationship that extends throughout the life cycle of a product and beyond.

“The program itself becomes the connective tissue for that common customer or that unique customer ID. When customers or the members are connecting their social accounts, engaging across all these different channels, it’s all tied back to that member program,” Smith says.

Rewards vs. Loyalty

Markey distinguishes between rewards programs and customer loyalty programs, despite the concepts appearing to be synonymous.

“The distinction is important to us because you earn a customer’s loyalty. You can never buy a customer’s loyalty. You can never drive loyalty, you can only earn it, and when we’re helping companies develop rewards programs, we’re quite cognizant of that, and we’re very careful to design the programs so that they create incentives for customers to take the right kinds of actions and behave in ways that generate value, but also won’t ever undermine the underlying objective, which is to earn the loyalty of the customer,” Markey says.

Can a well-crafted rewards program result in greater levels of customer loyalty? And does it matter who qualifies as a loyal customer if a larger percentage of shoppers are deeply engaged with a rewards program? The best rewards programs may be those that can attract and retain consumers who would otherwise be classified as passive or as detractors. To do that, marketers overseeing rewards programs need to define what success looks like; create enticing rewards that appeal to rational, experiential and emotional values; and market it to customers on their terms using data profiles.

“[Members] are not going to stay active in the program unless they understand what the value is to them, what the benefit is to them and they see the value,” Smith says. “They actually can get it.”

American Express

“It’s a program that’s been around for years and years. It’s evolved over time, and I think they’re very sophisticated about the array of redemption options that they offer and the ways they use the program to provide promotional incentives for certain types of behavior at a certain time,” Markey says.

Now available in 40 countries, American Express pioneered taking the basic rewards concept to the next level by the allowing members to transfer points to a large selection of airline and travel partners. In 2010, American Express became the first rewards card to allow card members to apply rewards points to Amazon orders. Two years later, American Express allowed points to be exchanged for e-gift cards and have since expanded their catalog of participating partners. In 2013, American Express created Use Points for Charges, which allows customers to pay off eligible credit card charges with accrued points. Its most recent innovation allows card members to use points online at Best Buy and Airbnb, and in bricks-and-mortar locations including Chili’s, McDonald’s and New York City taxicabs at the time of purchase.

“We are always focused on innovating and providing our card members with ways to use their points at the merchants they care about most,” says Jane Di Leo, manager of public affairs and communications for American Express. “For us, looking for partners is about truly understanding our card members—from where they like to shop to the experiences they desire.”

UFC

Along with building value for brands, rewards programs also double as a far more essential service: market research. The data companies collect from users who sign up for rewards programs allow them to identify, segment and better target their customers.

Mixed martial arts promoting company Ultimate Fighting Championship did just that. “One of their challenges from the very beginning is that a lot of their business is done through pay-per-view, which is a disintermediated channel for them. They don’t control who buys the pay-per-view,” says Geoff Smith, CMO of CrowdTwist, which helped design UFC’s program.

“They didn’t have a great insight,” Smith says. “They used this loyalty program as a way to get a much better picture of who their fans were and to be able to provide a much more personalized, differentiated program experience than they could push through the other marketing mechanisms they had in place.”

Because of its unique product, UFC can offer incredible limited-edition or exclusive experiences, including ringside tickets, dinner with UFC president Dana White and personal workout sessions with one of the fighters.

“As you can imagine, they’ve got these super fans who are really loyal and engaged with their brand, and watching fighters and following the stories,” Smith says.

Hilton HHonors

If you build it, they will come. That advice is a bit cliché, perhaps, but it’s a maxim that’s served Hilton Hotels well as it developed one of the most robust rewards programs in the hospitality industry. What began in the 1980s as an “instant win” scratch-off-based promotional program has become an industry benchmark, having just been ranked first in J.D. Power and Associates Hotel Loyalty/Rewards Satisfaction Report for the second year in a row.

All Hilton HHonors members receive instant benefits including exclusive discounts and access to digital tools including digital check-in, free Wi-Fi and a digital key available through the HHonors app. Personal HHonors credit cards can be obtained through American Express and Citi. There are more than 60 different airline partnerships that award member Hilton points at the same time they earn frequent flyer miles, and the chain also recently expanded its partnership with Uber.

Designations within the Hilton HHonors program also provide an emotional hook. By dividing loyalty members into tiers, the program offers prestigious designations, such as diamond level, that impart a status reward on top of any tangible benefits.

According to Mark Weinstein , senior vice president and global head of loyalty and partnerships at Hilton, more than 52 million members are enrolled in the program, with 6.2 million sign-ups coming last year alone.

“We have actually seen our guests become more loyal than ever,” Weinstein says. “Our members are engaging with us more and enrollments are up by more than 90 percent year-over-year.”

Excentus

The quest to create rewards programs has led to partnerships where points earned at one business can be spent at another. Called coalition rewards programs, these collaborative efforts boost the appeal to members by expanding the reach and usefulness of any given points system.

One such example of coalition partnership is The Fuel Rewards Program, developed by loyalty program provider Excentus , which allows members to redeem points earned at grocers, retailers and restaurants at the gas pump, where they are entitled to a cents-per-gallon discount.

Megan Flynn, executive vice president of program development, brand and communications for Excentus, explains how it works. “We have a relationship with a dining aggregator that brings us 11,000 restaurants across the United States. For every $50 that you spend across the restaurants—it doesn’t all have to be in the same restaurant—you save 10 cents per gallon. That's up to a 20-gallon fill, so if you were to go in, have a lunch with a couple of friends and spend $50, you could save up to $2 on your total gas purchase," she says.

The program does not prohibit members from offering their own separate rewards program, and it includes partnerships with Home Depot and MasterCard.

The Fuel Rewards Program also boasts a higher usage rate than most standalone rewards programs, according to Flynn. “On average our members redeem 78% of the rewards that they earn, and that’s compared to an industry where it’s usually about 35% of rewards are redeemed.”

Belly

While larger-than-life experiences can be great for facilitating active use of rewards programs, smaller businesses can’t compete with the resources available to national brands. But that doesn’t mean they are completely left out of the rewards game. They just need to be more creative.

That’s where Belly comes in. A digital rewards platform and CRM solutions startup, Belly started building rewards programs for mom and pop stores in 2011. Since then, it’s grown to a CRM solutions suite with 12,000 clients and close to 7 million users and counts convenience store giant 7-11 among its serviced brands. Along with rewards programs templates, Belly also helps businesses collect e-mail addresses and send out reminder messages calibrated to go out so many days after the last visit. There’s also help with social media integration and influencing Yelp reviews.

Businesses that join Belly are given a dedicated account manager, who helps them customize a set of rewards offerings. One all-star example, according to Belly’s director of words and reputations, Jennifer Beightol , is Molly’s Cupcakes in Chicago, which allows members to smash a cupcake in the owner’s face.

“We really pride ourselves in offering these experiential rewards,” Beightol says. “We have a very detailed onboarding program. It basically walks our merchants through exactly how to develop their rewards suite.”

Walgreens Balance Rewards

Drugstore giant Walgreens’ Balance Rewards program was launched in 2012. There were roughly 85 million active members as of August 2015. While the program does use traditional spend-and-get, rational components—customers earn 10 points for every dollar spent on select products (including prescriptions), with the opportunity to receive bonus points on featured products each week and use paperless coupons through the mobile app—there are industry-leading innovations as well.

In November, Walgreens became the first U.S. retailer to integrate its rewards program into Apple Pay, allowing users to purchase items in the checkout line using their iPhone or Apple Watch. Walgreens also partnered with MedM Health and Lumo Lift to develop health-tracking software that allows users to set health-related goals with the help of a digital health advisor. Tracking goals creates an incentive to frequently access the rewards program, and members are awarded points for making progress in meeting their goals.

“Our goal is to delight our customers and to build customer loyalty,” says Walgreens media-relations manager Emily Hartwig Mekstan . “The loyalty program should not only provide value, but also relevance through personalized communications, deals and offers.”

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Author Bio:

Zach Brooke

Zach Brooke is a staff writer for the American Marketing Association. He can be reached at zbrooke@ama.org.

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